o you’ve got money to invest, but you’re not sure where to start? Let’s assume that Danish tax laws don’t apply. Please seek legal advice before deciding which type of accounts or products to use if they do.
What is An ETF?
An ETF is a traded fund that tracks an index, like the Dow Jones or FTSE 100. It means that instead of buying shares in each company within this index directly, you can buy units in the relevant ETF instead. These units will move up and down, similar to an ordinary share but with much less risk.
ETFs have been available for a while in the US and UK, but only recently has trading of these products become more common in Europe. It’s great news for investors who want broad market exposure without investing large amounts of capital, as ETFs enable you to invest small amounts into a diversified portfolio quickly and easily.
Benefits of Trading in ETFs
There are several benefits of trading in ETFs. Read here all the benefits before investing in ETF stock markets.
Less Time Spent on Research
Although there are over 1,000 Danish-listed ETFs to choose from, many follow an index or commodity that limits your investment universe considerably. It means that you need less time researching individual companies’ performance and instead can spend this time studying macroeconomic data, which is more critical to long term returns.
As mentioned above, ETFs allow you to invest smaller amounts of cash into a diversified portfolio. Not only does this make investing more accessible to the retail investor, but it also makes it easier for companies to raise capital by issuing new shares/ETFs through stock market listings.
Many Danish brokers offer access to several ETFs covering different sectors or geographies, giving you the option to build your custom made index based on your risk preferences and return expectations. The cost of buying and selling these products is usually meager (check out Saxo Bank for more info), so even if you decide not to hold them forever, there should be no unexpected costs in either direction.
Although most ETFs are relatively new, trading volumes have increased steadily over the last few years. Most funds are also covered by a large counterpart, ensuring that you won’t get stuck with an liquid investment if an issuer defaults or runs out of cash to honor their promises. It makes them suitable for long-term investors and allows short-term traders to arbitrage price discrepancies when they arise.
Lack of Dividends
Some specific ETFs pay dividends, but these are usually limited to US-domiciled products. Most Danish brokers offer access to all popular US and European ETFs without additional cost making it easy to buy your favorite dividend aristocrat stock at roughly the exact cost as buying the ETF tracking it.
Long Term Buy and Hold
The liquidity and robustness of shares mean that most investors will benefit by focusing on long term buy and hold strategies. It’s especially true when you consider Denmark’s relatively high dividend withholding tax (27%, but often much lower for foreign investors).
ETFs to Consider
As mentioned earlier, there are now well over 1,000 Danish-listed ETFs from which to choose. Many US-domiciled products follow popular indices such as S& P 500 or MSCI Emerging Markets available for trading – all without additional cost – making it easy to build a diversified portfolio quickly.
What About The Risk?
Although ETFs are relatively new, there is no reason why they shouldn’t work in the long run. There are many examples of active managers beating their benchmarks over time, but most investors end up failing to beat the index simply due to costs and transaction fees. By trading an entire market via an ETF, you can eliminate these non-systematic risks.
Investing in index-tracking ETFs may not be for everyone, but it has many advantages over buying individual stocks as long as you understand the additional risks involved. These include tracking errors, tax implications, and transaction costs.
You may find that building a well-diversified ETF portfolio can provide most of the benefits of holding physical assets without having to worry about storage costs or asset safety.